"The Government Protects Union Members Through Tariffs."

Gary North - February 21, 2013

The London newspaper, the Telegraph, ran an article on the decision of Titan Corporation, a multinational firm that produces tires, to leave France. This company still produces Goodyear tires, but not in France. Not any longer.

Maurice Taylor, chief executive of Titan, years ago earned the nickname the Grizz, standing for grizzly. He is a no-nonsense corporate executive. The French government had asked Titan to invest in a tire production plant in northern France. It has been producing losses. Taylor's response is classic. "I have visited that factory a couple of times. The French workforce gets paid high wages but only works three hours. They get one hour for breaks and lunch, talk for three and work for three. I told this to the French union workers to their faces. They told me that's the French way!"

After five years of negotiations with the union, Goodyear will shut down the plant. This is a perfectly rational decision. My only comment is that it comes about four and a half years too late. In a letter to a senior French bureaucrat, Taylor made it clear why he is not interested in investing. "Sir, your letter states that you want Titan to start a discussion. How stupid do you think we are? Titan is the one with the money and the talent to produce tires. What does the crazy union have? It has the French government.

Here is his new strategy. "Titan is going to buy a Chinese tire company or an Indian one, pay less than one euro per hour wage and ship all the tires France needs. You can keep the so-called workers. Titan has no interest in the Amiens North factory."

I have not seen a letter like this from an American executive to any government agency. I have waited for something like this for at least 50 years. Admittedly, it was a letter from an American executive to a French bureaucrat, but at least he said it.

When an American reads something like this, he is amused. He thinks that the executive who sent the letter made a very good decision. Why should an American firm invest in a factory in France, in order to hire French workers, in order to pay more than the going wage in India or China? What is best for the American company? Obviously, it is best to pay Chinese or Indian workers, ship the tires to France, and pocket the difference. What possible sense would it make to continue to pay above market wages to a bunch of unionized French workers?

It will be better for French customers. They will be able to buy cheaper tires. Titan will have to compete against other firms that are doing the same thing.

AMERICAN UNION MEMBERS

Now let us move closer to home. The American unions would say that the company ought to produce all of the tires in American factories. The American company should hire American unionized workers.

These workers get above-market wages. Why should they be the ones to benefit from the sale of tires to French consumers?

Notice that Taylor did not mention the possibility of hiring American workers, also members of unions, to do this labor. Why not? Because Titan is going to pay one euro per hour in wages, which is about the equivalent these days of $1.30. Why should he pay an American worker 10 or 15 times more money than he can pay an Indian or Chinese worker?

At this point, the unions in the United States ought to have a moment of self-recognition. This is what we call a moment of truth. They should understand that they are being underbid by Chinese and Indian workers, and almost as effectively as the French workers are being underbid. These Indian and Chinese workers want jobs, and they are willing to work at a tenth of what an American worker is willing to work for. Why should an American company pay for expensive labor services that do not require many skills? The American company can build a factory, install robots, and hire efficient workers who really want to work for 10% or maybe 7% of what it would cost to hire an American worker. It will pay no Social Security taxes, no Medicare taxes, no Obamacare taxes.

This is going to take place around the world. It is taking place. This is why the United States, over the past 40 years, has gone from a country that had about 24% of its workforce employed in manufacturing to about 10%. This decline has gone on for a generation. There is no reason why it is not going to continue.

When you have a relatively unskilled labor force, this labor force is subjected to all kinds of competition from abroad. Equally unskilled people there are willing to work at ten cents on the dollar. It would be silly for American companies to continue to pay high wages to American workers, in the same way that it would be silly for an American company to pay high wages for French laborers. What is sauce for the goose is sauce for the gander, and that sauce is not exclusively French.

The only reason why French labor unions can survive is because of their support from the French government. The government keeps out non-unionized workers, who may not legally be hired. Exactly the same thing is true of American labor unions. It is government intervention and nothing else that gives labor unions the ability to extract above market wages from corporations. Today, those corporations can simply set up shop in India or China, and they can thumb their noses at the unions.

GETTING MARKETABLE SKILLS

There is no reason for any business to pay above-market wages when it does not have to. Customers want lower prices. The way to give customers what they want is to avoid overpaying for any resource. Any worker who wishes to compete in this environment is going to have to get skills that will make him worth the money that he is demanding from producers. American labor unions cannot compete with non-union workers, which is why very few union members have jobs in the private sector anymore. That era is gone. It has gone away very quietly.

Democrats and Republicans in the White House have all agreed: the government should reduce tariffs, reduce import quotas, and let foreign goods be sold to American consumers. This has been one of the great advantages that American consumers have had over the last 40 years. Really, it began under Kennedy. American consumers have had this advantage for 50 years.

It always amuses me that Democrats who are members of labor unions vote for Democrats in national elections. In every case, the Democrats who are elected President then reduce tariffs, which leads to further pressure on the union movement. This has been going on for half a century. The unions do not seem to catch on.

In other words, union members are as stupid about the Democratic Party as your standard conservative is about the Republican Party. Both groups cling tenaciously to the myth that they are getting something of value out of their favorite national political party. But when you look at the actual results, you find that, in most cases, the two parties in Washington have cooperated, and they have legislated policies that work against the voters who put them in office.

Republicans say they are in favor of higher tariffs to protect American business, but Republican Presidents seek to get tariffs lowered. Democrats say they are in favor of higher tariffs to protect American workers, but Democratic Presidents seek to get tariffs lowered. I am in favor of the Presidents who do this. Tariffs are a sales tax, and I like to seek the reduction of sales taxes on imports (tariffs). It always amuses me that union members and Republican voters alike go to the polls in order to keep tariffs high, and without exception, the people they elect as President reduce tariff protection.

There is no way to keep out competition from India and China. If we try to keep it out here, they are only going to compete against our corporations outside the jurisdiction of the United States. Today, if a manufacturing corporation is not multinational, and bringing in profits from abroad, it cannot compete. It is going to be a shrinking corporation. So, in order to compete, corporations need to be able to transfer capital abroad. They also need to be able to import the goods that are produced abroad. This is best for the American consumer, and it is what we have seen since the famous "Kennedy round" of tariff reductions in the early 1960s.

We have to compete in the world that is in front of us. It does no good to look backward and pretend that things were better back then, when sales taxes on imported goods were higher. This is why it is important that our children get good educations, which are also practical educations. Those children who do not learn the work ethic that is required to be an effective worker, competing against low-wage people outside the country, are going to find themselves on the defensive all their lives. They have to work smarter, and they have to be provided with the tools of production that they need to enable them to be high-output workers. Capital is what keeps wages high, not tariffs. Education is what enables workers to increase output, not tariffs. A strong work ethic is also mandatory, because Asians have hundreds of millions of workers with a highly developed work ethic. Necessity is the mother of invention, and there is a great deal of necessity in Asia.

If you want to know why the inner cities are hopeless under the present system of public education, and under the public system of subsidized living, which destroys the work ethic, just read the comments by Maurice Taylor. He is not going to hire them. No one is, unless the worker adopts the work ethic of the non-unionized middle class. There is no hope for these kids. The welfare state has destroyed their futures. They look to the state from the state, yet it is the state which has destroyed them.

CONCLUSION

The government is committed to lower tariffs. It has been for half a century. American workers had better adjust. The government is not going to bail them out with sales taxes on imports.